Solution Manual12

CHAPTER 12 

Responsibility Accounting and Total Quality Management ANSWERS TO REVIEW QUESTIONS 12-1 A responsibility-accounting system fosters goal congruen congruence ce by establishin establishing g the performan performance ce criteria criteria by which each manager will be evaluated. Development of  performance measures and standards for those measures can can help help to ensu ensure re that that mana manage gers rs are are striv strivin ing g towa toward rd goals that support the organization's overall objectives. 12-2 Goal congruenc congruence e results results when the managers managers of subunits througho throughout ut an organizat organization ion strive strive to achieve achieve objectives objectives that are consistent with the goals set by top management. In order for the organization to be successful, the managers and employees throughout the organization must be striving toward consistent goals. 12-3 Several benefits benefits of decentralization decentralization are as follows: (a) (a) The The mana manag gers ers of an organ ganizat izatio ion n's subun ubunit its s have ave specialized information and skills that enable them to manage their departments most effectively. (b) (b) Allo Allow wing ing manag anager ers s aut autonom onomy y in decis ecisio ion n makin aking g provi provides des manage manageri rial al traini training ng for futur future e higher higher-le -level vel managers. (c) Managers with some decision-making authority usua usuall lly y exhi exhibi bitt grea greate terr moti motiva vati tion on than than thos those e who who merely execute the decisions of others. (d) (d) Dele Delega gati ting ng some some decis decisio ions ns to lower lower-l -lev evel el manag manager ers s provides time relief to upper-level managers. (e) Delegating decision making to the lowest level poss possib ible le enab enable les s an orga organ nizat izatio ion n to give give a time timely ly response to opportunities and problems.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

Several costs of decentralization are as follows: (a) Manag Managers ers in a decent decentra raliz lized ed org organi anizat zation ion may have have a narrow focus on their own units' performance. (b) (b) Mana Manag gers ers may may tend tend to ignor ignore e the the cons conseq eque uenc nces es of  their actions on the organization's other subunits. (c) In a decentralized organization, some services may be duplicated unnecessarily.

tasks

or

12-4 (a) Cost cen centter: er: A re respon spons sibil bility ce center, th the man manager of whic which h is acco accoun unta tabl ble e for for the the subu subuni nit' t's s cost costs. s. (An (An example is a production department in a manufacturing firm.) (b) Revenu Revenue e center center:: A resp respons onsibi ibilit lity y center center,, the the manage managerr of which is accountable for the subunit's revenue. (An example is a sales district in a wholesaling firm.) (c) Profit Profit center center:: A respon responsib sibili ility ty center center,, the the manage managerr of  whic which h is acco accoun unta tabl ble e for for the the subu subuni nit' t's s prof profit it.. (An (An example is a particular restaurant in a fast-food chain.) (d) Invest estment center: A respo espon nsibi ibility cent enter, er, the manager of which is accountable for the subunit's profit and the capital invested to generate that profit. (An exam exampl ple e is a comm commut uter er airl airlin ine e divi divisi sion on of an airl airlin ine e company.) 12-5 It would be appropri appropriate ate to change change a particula particular r hotel from a profit center to an investment center if the manager of  the the hotel otel is given iven the autho uthorrity ity to make make sig signific ifican antt investment decisions affecting the hotel's resources. 12-6 12 -6 Flex Flexib ible le budg budgeti eting ng allo allows ws a perf perfor orman mance ce repo report rt to be constructed in a meaningful way. The performance report shou should ld compa omparre actu actua al exp expense enses s inc incurr urred wit with the the expe expens nses es that that shou should ld have have been been incu incurr rred ed,, give given n the the actual actual level level of activi activity. ty. The expens expenses es that that should should have been been incu incurr rred ed give given n the the actu actual al leve levell of acti activi vity ty can can be obtained from the flexible budget.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

Several costs of decentralization are as follows: (a) Manag Managers ers in a decent decentra raliz lized ed org organi anizat zation ion may have have a narrow focus on their own units' performance. (b) (b) Mana Manag gers ers may may tend tend to ignor ignore e the the cons conseq eque uenc nces es of  their actions on the organization's other subunits. (c) In a decentralized organization, some services may be duplicated unnecessarily.

tasks

or

12-4 (a) Cost cen centter: er: A re respon spons sibil bility ce center, th the man manager of whic which h is acco accoun unta tabl ble e for for the the subu subuni nit' t's s cost costs. s. (An (An example is a production department in a manufacturing firm.) (b) Revenu Revenue e center center:: A resp respons onsibi ibilit lity y center center,, the the manage managerr of which is accountable for the subunit's revenue. (An example is a sales district in a wholesaling firm.) (c) Profit Profit center center:: A respon responsib sibili ility ty center center,, the the manage managerr of  whic which h is acco accoun unta tabl ble e for for the the subu subuni nit' t's s prof profit it.. (An (An example is a particular restaurant in a fast-food chain.) (d) Invest estment center: A respo espon nsibi ibility cent enter, er, the manager of which is accountable for the subunit's profit and the capital invested to generate that profit. (An exam exampl ple e is a comm commut uter er airl airlin ine e divi divisi sion on of an airl airlin ine e company.) 12-5 It would be appropri appropriate ate to change change a particula particular r hotel from a profit center to an investment center if the manager of  the the hotel otel is given iven the autho uthorrity ity to make make sig signific ifican antt investment decisions affecting the hotel's resources. 12-6 12 -6 Flex Flexib ible le budg budgeti eting ng allo allows ws a perf perfor orman mance ce repo report rt to be constructed in a meaningful way. The performance report shou should ld compa omparre actu actua al exp expense enses s inc incurr urred wit with the the expe expens nses es that that shou should ld have have been been incu incurr rred ed,, give given n the the actual actual level level of activi activity. ty. The expens expenses es that that should should have been been incu incurr rred ed give given n the the actu actual al leve levell of acti activi vity ty can can be obtained from the flexible budget.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

12-7 Under activity-based responsibility accounting, mana manage geme ment nt's 's atte attent ntio ion n is dire direct cted ed towa toward rd acti activi viti ties, es, rather than being focused primarily on cost, revenue, and profit profit measures measures of subunit subunit performan performance. ce. ActivityActivity-based based responsibility accounting uses the database generated by an activity-based costing system coupled with nonfinancial measures of operational performance for key act activit ivitie ies. s. Such uch an appr pproac oach can can help elp man managem agemen entt eliminate non-value-added activities and improve the cost eff effect ectiven ivenes ess s of act activit ivitie ies s that that do add value lue to the the organization's product or service. 12-8 Attention Attention to the following following two factors factors may yield positive positive beha behavi vior oral al effe effect cts s from from a resp respon onsi sibi bili lity ty-a -acc ccou ount ntin ing g system. (a) (a) When When pro properl perly y used, sed, a respo espon nsibi sibili littyy-ac acco cou untin ting syst system em does oes not emph emphas asiz ize e blame lame.. The emph empha asis sis should be on providing the individual who is in the best position to explain a particular event or financial result with with info inform rmat atio ion n to help help in unde unders rsta tand ndin ing g reas reason ons s behind the event or financial result.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

(b) Distinguishing between controllable and uncontrollable costs or revenues helps the individuals who are evaluated under a responsibility-accounting system to feel as though they are evaluated on the basis of events and results over which they have some control or influence. 12-9 Rarely does a single individual completely control a result in an organization. Most results are caused by the joint efforts of several people and the joint impact of several events. Nevertheless, there is usually a person who is in the best position to explain a result or who is in the best position to influence the result. In this sense, performance reports based on controllability really are based on a manager's ability to influence results. 12-10 (a) Cost pool: A collection of costs to be assigned to a set of cost objects. (An example of a cost pool is all costs related to material handling in a manufacturing firm.) (b) Cost object: A responsibility center, product, or service to which a cost is assigned. (The various production departments in a manufacturing firm provide examples of cost objects. For example, the material-handling cost pool may be allocated across the various production departments that use materialhandling services.) 12-11 Cost allocation (or distribution): The process of  assigning costs in a cost pool to the appropriate cost objects. (An example of cost allocation would be the assignment of the costs in the material-handling cost pool to the production departments that use material-handling services. For example, the material-handling costs might be allocated to production departments on the basis of  the weight of the materials handled for each department.) 12-12 An example of a common resource in an organization is a computer department. The resource includes the computer itself, the software, and the computer specialists who run the computer system and assist its users. The opportunity costs associated with one person McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

using the computer resource include the possibility that another user will be precluded from or delayed in using the computer resource. Allocating the cost of the computer services department to the users makes the users aware of the opportunity cost of using the computer. 12-13 A computer system has a limited capacity at any one time. Allocating the cost of using the service to the user makes the user aware that his or her use of the system may preclude someone else from using it. Thus, the user is made aware of the potential opportunity cost associated with his or her use.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

12-14 A cost allocation base is a measure of activity, physical characteristic, or economic characteristic associated with the responsibility centers, which are the cost objects in the allocation process. One sensible allocation base for assigning advertising costs to the various components of  a large theme park is the number of people patronizing the park's various components. Presumably, the number of people attending a certain part of the theme park is an indication of how popular that part of the park is. Notice that in most cases the sales revenue generated by the various components of the theme park is not a viable allocation base, since most theme parks have a single admission fee for the entire park. 12-15 Marketing costs are distributed to the hotel's departments on the basis of budgeted sales dollars so that the behavior of one department does not affect the costs allocated to the other departments. If, on the other hand, the marketing costs had been budgeted on the basis of actual sales dollars, then the costs allocated to each department would have been affected when only one department's actual sales revenue changed. 12-16 A segmented income statement shows the segment margin for each major segment of the enterprise. 12-17 Many managerial accountants believe that it is misleading to allocate common costs to an organization's segments. Since these costs are not traceable to the activities of segments, they can be allocated to segments only on the basis of a highly arbitrary allocation base. 12-18 It is important in responsibility accounting to distinguish between segments and segment managers, because some costs that are traceable to a segment may be completely beyond the influence of the segment manager. Proper evaluation of the segment as an investment of the company's resources requires that these costs be included with costs associated with the segment. However, in evaluations of the manager's performance, these costs should be excluded, since the manager has no control over them.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

12-19 Three key features of a segmented income statement are as follows: contribution format, identification of  controllable versus uncontrollable expenses, and segmented reporting, which shows income statements for the company as a whole and for each of its major segments. 12-20 A common cost for one segment can be a traceable cost for another segment. For example, the salary of the general manager of a hotel is traceable to that segment of the entire hotel company. However, the salary of the hotel's general manager is a common cost for each of the departments in that hotel, such as the food and beverage department and the hospitality department. 12-21 Customer profitability analysis refers to using the concepts of activity-based costing to determine how serving particular customers causes activities to be performed and costs to be incurred. Examples of activities that can be differentially demanded by customers include order frequency, order size, special packaging or handling, customized parts or engineering, and special machine setups. Such activities can make some customers more profitable than others. 12-22 Four types of quality costs are as follows: (a)

Prevention costs: the costs of preventing defects.

(b) Appraisal costs: the costs of determining whether defects exist. (c) Internal failure costs: the costs of repairing defects found prior to product sale. (d) External failure costs: the costs defective products have been sold.

incurred

when

12-23 Observable quality costs can be measured and reported, often on the basis of information in the accounting records. For example, the cost of inspectors' salaries is an observable quality cost. Hidden quality costs cannot easily be measured, reported, or even estimated. For example, the opportunity cost associated McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

with lost sales after a defective product is sold is a hidden quality cost to the company. 12-24 A product's quality of design is how well it is conceived or designed for its intended use. The product's quality of  conformance refers to the extent to which a product meets the specifications of its design. 12-25 A product's grade is the extent of its capability in performing its intended purpose, viewed in relation to other products with the same functional use. An example in the service industry is airline travel. Airplane seats may be coach class or first class; the difference lies in seat size, comfort, and service. Either class will take you from Los Angeles to Chicago, but not with the same degree of  comfort. 12-26 "An ounce of prevention is worth a pound of cure" can be interpreted in terms of resources expended on various categories of quality costs. A dollar spent on prevention may save many dollars of appraisal, internal failure, or external failure costs. 12-27 A cause and effect diagram shows by means of  connected lines all the possible causes of a particular type of defect in a product or service.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

SOLUTIONS TO EXERCISES EXERCISE 12-28 (10 MINUTES) The type of responsibility center most appropriate for each of  the following organizational subunits is indicated below. (1 Movie theater: Cost center or profit center. ) (2 Radio station: Profit center. ) (3 Claims department: Cost center. ) (4 Ticket sales division of an airline: Revenue center. ) (5 Bottling plant: Cost center. ) (6 Orange juice factory: Profit center. ) (7 College of engineering at a university: Profit center. ) (By designating the college of engineering as a profit center, this subunit is encouraged to generate research grants and manage its operations most effectively. The term "profit center" is used in a slightly different way here. No subunit in a university really makes a profit. However, treating the college of  engineering like a profit center means that this subunit's management will have considerable authority in managing the subunit's revenues and expenses.) (8 European division of a multinational manufacturing ) company: Investment center.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

(9 Outpatient clinic in a profit-oriented hospital: Profit ) center. (1 Mayor's office of a city: Cost center. 0)

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

EXERCISE 12-29 (10 MINUTES) The appropriate responsibility-accounting treatment for each of the scenarios is the following: (1 Since the cost of idle time incurred in Department B was ) due to the breakdown of improperly maintained machinery in Department A, the costs of the idle time should be charged to Department A. (2 If the machinery had been properly maintained, it would ) be more appropriate not to charge the cost due to idle time in Department B back to Department A. This cost should be considered a normal cost of operating in a sequential production environment. The managers of  Department B should anticipate such normal machine breakdowns and plan their production scheduling to accommodate such events. EXERCISE 12-30 (10 MINUTES) The Maintenance Department should not be charged for the excess wages of the skilled employees who are temporarily assigned to the Maintenance Department. Modifications should be made in the responsibility-accounting system as follows: (1) the Maintenance Department should be charged with only the normal wages for maintenance employees, $12 per hour. (2) The additional $10 per hour ($22 – $12) should be charged to a top management level account, since the decision to keep these employees on the payroll was made by top management. EXERCISE 12-31 (10 MINUTES) By designating this department as a profit center, the corporation has given the managers of the department an opportunity to manage their operation just like a full-fledged business. These managers have specialized knowledge and skills that make them experts in the area of logistics and distribution. They are in the best position to read the needs of  other units to whom they provide logistics services, and are also in the best position to make cost-benefit trade-offs that arise in the provision of logistical services. By treating this McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

service department as a profit center, the organization has given its managers an incentive to control costs and also provide a quality service that meets the needs of its customers. A profit center such as this might not be free to sell its services outside the company. Moreover, the creation of this profit center suggests the need for an internal pricing structure for services supplied to other subunits.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

EXERCISE 12-32 (50 MINUTES) PERFORMANCE REPORTS FOR MARCH: SELECTED SUBUNITS OF ALOHA HOTELS AND RESORTS (IN THOUSANDS)

Food and Beverage Department Banquets & Catering.................... Restaurants............ Kitchen.................. Total profit............. Kitchen Kitchen staff wages Food...................... Paper products....... Variable overhead. . Fixed overhead.......

Flexible Budget*  Year to March Date**

Actual Results*

$ 650 1,800

(1,065) (3,233) $ $ 1,385 4,227

Total expense.........

$ $ 658 1,923 1 ,794 5,534 (1,069 (3,242 ) ) $ $ 1,383 4,215

$8F

$ 13 F

6U 4U

16 U 9U

$2 U

$12 U

$ $ (86) (255) (690) (2,111) (122) (370) (78) (232) (93) (274)

$1 U

$ 2U

— 3F 3U 3U

1U 5F 7U 4U

$4 U

$ 9U

$ $ (85) (253) (690) (2,110) (125) (375) (75) (225) (90)

McGraw-Hill/Irwin Managerial Accounting, 5/e

$ 1,910 5,550

March

 Year to Date**

March

(270) ©  2002

$ $ (1,065) (3,233)

 Year to Date**

Variance†

The McGraw-Hill Companies, Inc. 12-13

$(1,06 $ 9) (3,242)

*Numbers without parentheses denote profit; numbers with parentheses denote expenses. †

F denotes favorable variance; U denotes unfavorable variance.

**Year-to-date column equals year-to-date column for February in Exhibit 12-4 in the text plus March amount. For example, $1,910 equals $1,260 plus $650.

Total expense.........

$ $ (1,065) (3,233)

$(1,06 $ 9) (3,242)

$4 U

$ 9U

*Numbers without parentheses denote profit; numbers with parentheses denote expenses. †

F denotes favorable variance; U denotes unfavorable variance.

**Year-to-date column equals year-to-date column for February in Exhibit 12-4 in the text plus March amount. For example, $1,910 equals $1,260 plus $650.

McGraw-Hill/Irwin 12-14

©  2002

The McGraw-Hill Companies, Inc. Solutions Manual

EXERCISE 12-33 (30 MINUTES) 1.

Allocation of costs: Division

Admissions (enrollment) Registrar

$36,000 $28,800 $25,200 (1,000/2,5 (800/2,500 (700/2,500 00) ) ) $56,250

$52,500

$41,250

$90,000

$150,000

EXERCISE 12-33 (30 MINUTES) 1.

Allocation of costs: Division

Admissions (enrollment) Registrar (credit hours) Computer Services (courses requiring computer)

$36,000 $28,800 $25,200 (1,000/2,5 (800/2,500 (700/2,500 00) ) )

$90,000

$56,250 $52,500 $41,250 $150,000 (30,000/80 (28,000/80 (22,000/80 ,000) ,000) ,000) $64,000 (12/60)

$128,000 (24/60)

$128,000 (24/60)

$320,000

The Admissions Department costs are allocated on the basis of enrollment. The more students enrolled in a division, the more admissions there are to process. The Registrar's costs are allocated on the basis of  credit hours. The greater the number of credit hours, the more course registrations there are to process. The Computer Services Department's costs are allocated on the basis of the number of courses requiring computer work. The greater the number of computerintensive courses, the greater will be the demands placed on the Computer Services Department. 2.

The number of courses would probably be a better allocation base for the Registrar's costs. Costs in this department are driven by processing course registrations, not credit hours. A four-credit course does not require any more registration effort than a three-credit course.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

The estimated amount of computer time required would probably be a better allocation base for the Computer Services Department. Two different courses requiring computer work could place vastly different demands on the Computer Services Department.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

EXERCISE 12-34 (40 MINUTES) SEGMENTED INCOME STATEMENTS: COUNTYWIDE CABLE SERVICES, INC.

Service revenue......

County wide Cable Service s $2,200, 000

Segments of Company Metro

Suburb Outlyin an g $1,000, $ $ 000 800,000 400,000

Variable expenses. . . Segment contribution margin Less: Fixed expenses controllable by segment manager................ Profit margin controllable by segment manager.. Less: Fixed expenses, traceable to segment, but controllable by others..................... Profit margin traceable to segment................ Less: Common fixed expenses Income before taxes

450,00 200,000 150,000 0 $1,750, $ $ 000 800,000 650,000

100,000

870,00 400,000 320,000 0

150,000

$ $ $330,00 880,00 400,000 0 0

$ 150,000

520,00 230,000 200,000 0

90,000

$ $ $130,00 360,00 170,000 0 0

$ 60,000

$ 300,000

95,000 $ 265,00 0

Less: Income tax McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

expense.................. Net income..............

145,00 0 $ 120,00 0

EXERCISE 12-35 (5 MINUTES) 1 .

appraisal cost

2 .

external failure cost

3 .

internal failure cost

4 .

prevention cost

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

EXERCISE 12-36 (20 MINUTES) SAN MATEO CIRCUITRY QUALITY COST REPORT

Current Month's Costs Prevention costs: Training of quality-control inspectors...... Total................................................... Appraisal costs: Inspection of purchased electrical components............................................. Tests of instruments............................... Total................................................... Internal failure costs: Costs of rework...................................... Costs of defective parts that cannot be salvaged.................................................. Total................................................... External failure costs: Replacement of instruments already sold Total................................................... Total quality costs....................................

Percent age of  Total

$21,000 $21,000

22.2

$12,000

12.7

30,000 $42,000

31.7

$ 9,000 6,100

9.5 6.5

$15,100 $16,500 $16,500

17.4 _____

$94,600 100.0 0

EXERCISE 12-37 (10 MINUTES) Observable quality costs in the airline industry: •

•

•

Cost of repairing damaged luggage. Cost of providing lodging for passengers stranded when a flight is cancelled due to equipment malfunction. Cost of cleaning a passenger's clothing when a flight attendant spills food or beverages on the passenger.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

EXERCISE 12-37 (CONTINUED) Hidden quality costs in the airline industry: •

•

•

Cost of lost flight bookings when passengers judge inflight service to be substandard. Cost of lost flight bookings when potential passengers are unable to get through to the airline's reservations service. Cost of lost flight bookings when passengers react to cancelled or late flights.

EXERCISE 12-38 (30 MINUTES) Answers will vary widely, depending on the company chosen. Some examples are as follows: Marriott Hotels: Company-owned hotel, profit center McDonald’s Corporation: Company-owned resaurant, profit center NationsBank: Regional division of company, investment center Pizza Hut: Kitchen in an individual restaurant, cost center Ramada Inn: National reservations center, revenue center Xerox Corporation: Individual manufacturing department or work center, cost center

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

SOLUTIONS TO PROBLEMS PROBLEM 12-39 (30 MINUTES) A wide range of possible responses is possible for this problem. The organization chart and companion chart showing responsibility accounting designations should be similar to the charts given for Aloha Hotels and Resorts in Exhibits 12-1 and 12-2, respectively. The letter to stockholders should specify the responsibilities of the managers shown in the charts. Refer to the discussion of Exhibits 12-1 and 12-2 in the text. The charts in Exhibits 12-1 and 12-2 are repeated here for convenience.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

PROBLEM 12-39 (CONTINUED)

Aloha Hotels and Resorts, Inc.

Oahu Division

Maui Division

Seven hotels on the Island of Mau

Two other hotels on the Island of Oahu

Waikiki Sands Hotel (Honolulu)

Grounds Housekeepi Recreationa Food and Hospitality and ng and l Services Beverage Department Maintenanc Custodial Department Department e Department

Banquets and Catering

McGraw-Hill/Irwin

Restaurants

©  2002

Kitchen

The McGraw-Hill Companies, Inc.

PROBLEM 12-39 (CONTINUED) MANAGER

RESPONSIBILI TY 

President of Aloha Hotels and Resorts,

Investme nt Center

Vice President of  Oahu Division

Investmen t Center

General Manager of  Waikiki Sands

Profit Center

Director of Food and Beverage Department

Profit Center

Head Chef 

McGraw-Hill/Irwin

Cost Center

©  2002

The McGraw-Hill Companies, Inc.

PROBLEM 12-40 (40 MINUTES) Once again, a wide range of responses is possible, depending on the organization designed in the preceding problem. The format for the performance reports is given in Exhibit 12-4 for Aloha Hotels and Resorts. This exhibit is repeated here for convenience.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

PERFORMANCE REPORTS FOR FEBRUARY: SELECTED SUBUNITS OF ALOHA HOTELS AND RESORTS (IN THOUSANDS)

Company Maui Division... ...

Flexible Budget*  Year  Year to Februa Date ry $30,66 $64,56 0 7 $18,40 $38,62 0 0

Variance†

Actual Results*

Februa ry $30,71 6 $18,47 0

Year Year to Date $ 64,570 $ 38,630

Februa ry $ 56 F

$ 3F

$ 70 F

$10 F

14 U

7U

$ 56 F

$ 3F

$ 10 F

$40 F

50 U

70 U

26 F

23 F

$ 14 U

$ 7U

Oahu Oahu Division Division.. . Total Pr Profit.... ...... .. Oahu Division Waimea Beach Resort............. Diamond Head Lodge.............. Waikiki Sands Hotel............... Total Pr Profit.... ...... .. Waikiki Sands Hotel Grounds & Maintenance.... Housekeeping & Custodial Recreational Services.......... Hospitality. . . . . . Food and Beverage......... Total Profit......

12,260 12,2 60 $30,66 0

25,947 25,9 47 $64,56 7

12,24 12, 246 6 $30,71 6

25,94 25, 940 0 $ 64,570

$ 6,050 2,100

$12,70 0 4,500

$ 6,060 2,050

$ 12,740 4,430

4,110 $12,26 0 $ (45) (40) 40

4,1 4,136 $12,24 6

$

$ (90)

(44)

(90) 85

2,800 6,000 1,355 2,842 $ $ 4,110 8,747

Food and Beverage Dept. Banquets & $ Catering 600 Restaurants..... 1,785

McGraw-Hill/Irwin

8,74 8, 747 7 $25,94 7

$ 1,260 3,750

(41) 41

8,77 8, 770 0 $ 25,940 $ (90)

$

605

1,760

$

1F

--

1U 1F

-$ 3F

40 F 15 U

30 F 10 U

$ 26 F

$23 F

$

5F

$ 5F

25 U

10 U

(90) 88

2,840 6,030 1,340 2,832 $ 4,136 $ 8,770 $ 1,265 3,740

©  2002

Year Year to Date

The McGraw-Hill Companies, Inc.

Kitchen........... Total profit...... Kitchen Kitchen staff  wages............. Food............... Paper products Variable overhead......... Fixed overhead Total expenses

5F

5U

(1,0 (1 ,030 30 ) (2,1 2, 168 ) (1, (1 ,02 025 5) (2,17 2, 173 3) $ $ $ 1,340 $ 1,355 2,842 2,832

$ 15 U

$10 $1 0U

$

$

2F

$ 1U

3U 5F 1U

1U 2F 4U

2F

1U

5F

$ 5U

(80) (675) (120) (70)

$ $ (168) (78) (1,420) (678) (250) (115) (150) (71)

(85) (180) $(1,030 $(2,16 ) 8)

(83) $(1,02 5)

$ (169) (1,421) (248) (154) (181) $(2,17 3)

$

* Numbers without parentheses denote profit; numbers with parentheses denote expenses. † F denotes favorable variance; U denotes unfavorable variance.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

PROBLEM 12-41 (35 MINUTES) Memorandum Date:

Today

To:

Sandy Beach, General Manager of Waikiki Sands Hotel

From: I.M. Student Subje Responsibility Centers ct: The Waikiki Sands Hotel is a profit center as specified by the corporation's top management. The hotel's general manager does not have the authority to make significant investment decisions, so an investment-center designation would be inappropriate for the hotel. The Grounds and Maintenance Department and the Housekeeping and Custodial Department should be cost centers, since these departments do not generate revenue. The Food and Beverage Department should be a profit center, since the department's manager can influence both the costs incurred in the department and the revenue generated. The Food and Beverage Director can determine the menu, set meal prices, and make entertainment decisions, all of which significantly influence the department's revenue. The Hospitality Department also should be a profit center. The Director of Hospitality has significant influence in setting room rates and making decorating decisions, which affect the department's revenue. The Director also makes hiring and salary decisions for the department's staff, which significantly affect departmental expenses. The Hospitality Department's three subunits (Front Desk, Bell Staff, and Guest Services) should be cost centers, since they do not generate revenue. The managers of these subunits can significantly influence the costs incurred in their units through hiring and salary recommendations, staff scheduling, and use of materials and equipment.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

PROBLEM 12-42 (60 MINUTES) 1 .

Performance Report for August: Selected Subunits of Rocky Mountain General Hospital

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

Rocky Mountain General Hospital General Medicine Division Surgical Division Medical Support Division Administrative Division............. Total cost.......... Medical Support Division Nursing Department....... Radiology and Laboratory Department....... Nutrition Department....... Housekeeping Department Maintenance Department Total cost.......... Nutrition Department Regiestered Dieticians’ Section............. Food Service Section............. Kitchen............. Total cost..........

McGraw-Hill/Irwin

Flexible Budget Actual Results Variance*  Year Year Year to to to August Date August Date August Date $582,7 $4,661, $581,1 $4,658, $ $ 00 600 50 300 1,550 F 3,300 F $210,0 $1,680, 00 000 140,00 1,120,0 0 00 182,70 1,461,6 0 00

$204,0 $1,670, $ $ 00 900 6,000 F 9,100 F 141,00 1,115,8 1,000 4,200 F 0 00 U 182,65 1,465,6 50 F 4,000 0 00 U

50,000

400,00 0 $582,7 $4,661, 00 600

53,500

$ 70,000

$ 560,00 0

$ 75,000

580,00 0

18,000 71,700

144,00 0 573,60 0 80,000

18,100 71,950

144,00 0 578,60 0 86,000

10,000

13,000

104,00 0 $182,7 $1,461, 00 600

$

7,500 33,200

31,000 $71,70 0

$ 60,000 265,60 0 248,00 0 $ 573,60 0

406,00 3,500 6,000 0 U U $581,1 $4,658, $ $ 50 300 1,550 F 3,300 F

11,600

$ 5,000 U 100 U 250 U 1,600 U

$20,00 0U

-5,000 U 6,000 U

6,000

77,000 7,000 F 27,000 F $182,6 $1,465, $ 50 $ 50 600 F 4,000 U

$ 7,500 35,050 050

$ 60,000 -272,60 $1,850 0 U

29,400

1,600 F

$71,95 0

246,00 0 $ $ 250 578,60 U 0

©  2002

-$ 7,000 U 2,000 F $ 5,000 U

The McGraw-Hill Companies, Inc.

Food Service Section Patient Food Service..............

$17,00 0

$136,0 00

$18,50 0

16,200

16,550

$33,20 0

129,60 0 $265,6 00

Cafeteria Food servers’ wages...............

$ 8,000

$ 64,000

$ 9,000

$ $1,000 72,000 U

Paper products. . Utilities.............

4,500 1,000

36,000 8,000

4,400 1,050

36,200

Maintenance......

400

3,200

100

Custodial...........

1,100

8,800

1,100

Supplies............

1,200

Total cost..........

$16,20 0

Cafeteria........... Total cost..........

9,600 $129,6 00

$35,05 0

900 $16,55 0

$ $1,500 137,00 U 0 350 135,60 U 0 $ $1,850 272,60 U 0

8,100 1,100

100 F 50 U

$ 1,000 U 6,000 U $ 7,000 U $ 8,000 U 200 U 100 U

300 F 2,100 F --

200 F

300 9,600 F $ $ 350 135,60 U 0

--

8,600

$ 6,000 U

*F denotes favorable variance; U denotes unfavorable variance.

2.

Arrows are included on the performance report to show the cost relationships.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

PROBLEM 12-42 (CONTINUED) 3 .

A variety of responses are reasonable for this question. Since the data given in the problem do not include the individual variances over several months, it is not possible to condition the investigation on trends. The largest variances in the performance report are the most likely to warrant an investigation. The following variances for August would likely catch the attention of the hospital administrator: General Medicine Division.................................. Administrative Division...................................... Nursing Department.......................................... Maintenance Department.................................. Food servers' wages..........................................

$6,00 0 3,500 5,000 7,000 1,000

F U U F U

The $1,000 variance for food servers' wages is smaller than some of the variances not listed above. However, it is a relatively large variance for only one cost item in the subunit. In contrast, the $1,600 variance for the kitchen is for an entire subunit of the hospital.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

PROBLEM 12-43 (45 MINUTES) 1. Cost Pool Facilities

Division General Medicine........ Surgical......... Medical Support......... Administrativ e................... Total..............

Allocati on Base 15,000 sq. ft. 8,000 sq. ft. 9,000 sq. ft. 8,000 sq. ft.

General 135,000 cu. ft. Medicine........ Surgical......... 100,000 cu. ft. Medical Support......... Administrativ e...................

90,000 cu. ft.

Total..............

cu. ft.

General Medicine........ administra Surgical......... tion Medical Support......... Administrativ e................... Total..............

Communit McGraw-Hill/Irwin

General

20.0% 100.0 %

38,000 $190,0 00

33.75 % 25.00 % 22.50 %

$ 8,100 6,000

18.75 % 100.00 %

4,500

5,400

cu. ft. 75,000 400,000

General

20.0% 22.5%

Costs Distrib uted $ 71,250 38,000 42,750

sq. ft. 40,000

Utilities

Percent age of  Total 37.5%

30 empl.

$ 24,000 $ 66,000 44,000

100

30.00 % 20.00 % 20.00 % 30.00 % 100.00 %

$2,000,

50.00

$

20 empl. 20 empl. empl. 30 empl.

©  2002

44,000 66,000 $220,0 00

The McGraw-Hill Companies, Inc.

y outreach

Medicine........ Surgical......... Medical Support......... Administrativ e................... Total..............

000 1,250,0 00 750,000 — $4,000, 000

% 31.25 % 18.75 % —

20,000 12,500

100.00 %

$ 40,000

7,500 —

2.

An alternative allocation base for community outreach costs is the number of hours spent by each division's personnel in community outreach activities. This base would be more reflective of the actual contribution of each division to the program.

3.

The reason for allocating utility costs to the divisions is so that each division's cost reflects the total cost of running the division. Since none of the divisions can operate without electricity, heat, water, and so forth, these costs should be reflected in divisional cost reports. By allocating such costs, division managers are made aware of these costs and are able to reflect the costs when pricing services and seeking third-party reimbursements, such as those from insurance companies.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

PROBLEM 12-44 (35 MINUTES) 1. Segmented income statement: ShowOff, Inc.

Las Vegas

Reno

Sacramen to

$444, 000

$451, 000

$437,000

$203, 500 26, 640 $230, 140 $213, 860

$225, 500 27, 060 $252, 560 $198, 440

$276,000

$ 11,00 0 --$ 11,00 0

$ 22,00 0 --$ 22,00 0

$ 48,000

$ 434,080

$202, 860

$176, 440

$ 54,780

$ 12,500 108, 000 28, 200 $ 148,700

$ 4,500 31, 000 5, 800 $ 41,30 0 $161,

$ 2,000 39, 000 4, 600 $ 45,60 0 $130,

$

Sales $1,332, revenue…………………………… 000 …. Variable operating expenses: Cost of goods $ sold…………………… 705,000 Sales 79, commissions…………………… 920 Total……………………… $ ………... 784,920 Segment contribution $ margin……………. 547,08 0 Less: Fixed expenses controllable by segment manager: Local $ advertising………………… 81,000 …… Sales manager 32, salary………………… 000 Total……………………… $ ………... 113,000 Profit margin controllable by segment manager……………………… ………… Less: Fixed expenses traceable to segment, but controllable by others: Local property taxes………………….. Store manager salaries………………. Other…………………………… ……….. Total……………………… ………... Segment profit McGraw-Hill/Irwin

$

©  2002

26,220 $302,220 $134,780

32,000 $ 80,000

6,000 38,000 17,800

$ 61,800 $

The McGraw-Hill Companies, Inc.

margin…………………….. Less: Common fixed expenses…………. Net income………………………… ………...

285,380 192, 300 $ 93,080

560

840

(7,020)

Calculations: Sales revenue: Las Vegas, 37,000 units x $12.00; Reno, 41,000 units x $11.00; Sacramento, 46,000 units x $9.50 Cost of goods sold: Las Vegas, 37,000 units x $5.50; Reno, 41,000 units x $5.50; Sacramento, 46,000 units x $6.00 Sales commissions: Las Vegas, $444,000 x 6%; Reno, $451,000 x 6%; Sacramento, $437,000 x 6%

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

PROBLEM 12-44 (CONTINUED) 2. Sacramento is the weakest segment because of several factors: Las Vegas and Reno have much higher markups on cost [118%( $6.50/$5.50) and 100% ($5.50/$5.50), respectively]. However, Sacramento’s markup is only 58% ($3.50/ $6.00). Despite being the only store that has a sales manager, and spending considerably more on advertising than Las Vegas and Reno, Sacramento has the lowest gross dollar sales of the three stores. Sacramento’s return on these outlays appears inadequate. Sacramento’s “other” noncontrollable costs are much higher than those of Las Vegas and Reno. •

•

•

3. Show-Off uses a responsibility accounting system, meaning that managers and centers are evaluated on the basis of  items under their control. Since this is a personnel-type decision, the decision should be made by reviewing the profit margin controllable by the store (i.e., segment) manager. The segment contribution margin excludes fixed costs under a store manager’s control; in contrast, a store’s segment profit margin would reflect all traceable costs whether controllable or not.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

PROBLEM 12-45 (35 MINUTES) 1. Warranty costs: External failure Reliability engineering: prevention Rework at AT’s manufacturing plant: internal failure Manufacturing inspection: appraisal Transportation costs to customer sites: external failure Quality training for employees: prevention 2&3. Evaluation of quality costs: No. 165 $

No. 172

% of   Sales

Sales revenue: $60,000 x 80; $4,800, $55,000 x 100... 000 Prevention: Reliability engineering 1,600 hours x $ $150……… 240,00 0 2,000 hours x $150……… Quality training………………. Total…………… ……… Appraisal (inspection): 300 hours x $50………………. 500 hours x $50………………. Internal failure (rework at AT): 80 units x 35% x $1,900…….. 100 units x 25% x McGraw-Hill/Irwin

$ 15,000

$ 53,200

% of   Sales

$5,500, 000

35, 000 $ 275,00 0

$

5.73%

$ 300,00 0 50, 000 $ 350,00 0

6.36%

.31% $ 25,000

.45%

$

.73%

1.11%

©  2002

The McGraw-Hill Companies, Inc.

$1,600…… External failure: Warranty costs: 80 units x 70% x $1,200… 100 units x 10% x $400…. Transportation to customers Total…………… ……… Total quality costs………………..

McGraw-Hill/Irwin

40,000 $ 67,200 29, 500 $ 96,700 $ 439,90 0

2.01% 9.16%

©  2002

$ 4,000 15, 000 $ 19,000 $ 434,00 0

.35% 7.89%

The McGraw-Hill Companies, Inc.

PROBLEM 12-45 (CONTINUED) Individual quality costs as a % of total quality costs: No. 165 $ % of   Total Prevention… …….. Appraisal ………... Internal failure …. External failure…. Total ………….

$275, 000 15, 000 53, 200 96, 700 $439, 900

62.51 % 3.41 % 12.09 % 21.98 %

No. 172 $ % of   Total $350, 000 25, 000 40, 000 19, 000 $434, 000

80.65 % 5.76 % 9.22 % 4.38 %

4. Yes, the company is “investing” its quality expenditures differently for the two machines. Advanced is spending more up-front on no. 172 with respect to prevention and appraisal—over 86% of the total quality expenditures. (This figure is approximately 66% for no. 165.) The net result is lower internal and external failure costs and, perhaps more important, lower total quality costs as a percentage of sales (7.89% for no. 172 and 9.16% for no. 165). This problem illustrates the essence of total quality management systems when compared with conventional quality control procedures. Overall costs are lower with TQM when compared against systems that focus on “afterthe-fact” detection and rework. 5. Prevention, appraisal, internal failure, and external failure costs are observable in the sense that such amounts can be measured and reported. When inferior products make it to the marketplace, customer dissatisfaction will often increase, resulting in lost sales of the defective product and perhaps other goods as well. The “cost” of these lost sales is an opportunity cost—a “hidden” cost that is very difficult to measure. McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

PROBLEM 12-46 (75 MINUTES) 1.

SEGMENTED INCOME STATEMENTS: BUCKEYE DEPARTMENT STORES , INC. (IN THOUSANDS )

Segments of  Company

Sales revenue ....................... Variable operating expenses: Cost of merchandise sold.... Sales personnel—salaries.... Sales commissions.............. Utilities.............................. Other................................. Total variable expenses...... Segment contribution margin.. Less: Fixed expenses controllable by Depreciation—furnishings. . . Computing and billing......... Warehouse......................... Insurance........................... Security............................. Total..................................... Profit margin controllable by segment manager................. Less: Fixed expenses, traceable to Depreciation—buildings...... Property taxes................... Supervisory salaries........... Total..................................... Profit margin traceable to segment................................ Less: Common fixed expenses. Income before taxes............... Less: Income tax expense....... Net income............................

Segments of Columbus Division

Buckeye Departme nt Stores, $39,400

Cleveland $21,000

Columbus Division $18,400

$23,000 3,050 380 590 465 $27,485 $11,915

$12,000 1,600 200 300 250 $14,350 $ 6,650

$11,000 1,450 180 290 215 $13,135 $ 5,265

560 405 780 355 350 $2,450

$ 290 210* 450 200 210 $1,360

$ 270 195 330 155 140 $1,090

80 40 70 40 30 $ 260

$

$9,465

$5,290

$4,175

$1,150

$ (230)

$ 930 305 1,750 $2,985 $6,480

$ 470 170 1,000 † $1,640 $3,650

$ 460 135 750 $1,345 $2,830

$ 120 35 150 $ 305 $ 845

$

Olentangy Scioto Store Store $5,000 $2,400 $3,000 400 50 80 60 $3,590 $1,410 $

$2,000 300 40 60 35 $2,435 $ (35) $

50 30 60 25 30 195

$

90 20 100 $ 210 $(440)

Downtown Store $11,000 $6,000 750 90 150 120 $ 7,110 $ 3,890 $

140 75 200 90 80 $ 585

$3,305 250 80 400 $ 730 $ 2,575

*$210 = $160 listed in table + $50 not allocated. allocated.

©  2002

†

50

$

_____ 50 (50)

$

120 $6,360 1,950 $4,410

McGraw-Hill/Irwin Managerial Accounting, 5/e

Not Allocated

The McGraw-Hill Companies, Inc. 12-41

$1,000 = $900 listed in table + $100 not

$ 100 $ 100 $ (150)

*$210 = $160 listed in table + $50 not allocated. allocated.

McGraw-Hill/Irwin 12-42

†

$1,000 = $900 listed in table + $100 not

©  2002

The McGraw-Hill Companies, Inc. Solutions Manual

PROBLEM 12-46 (CONTINUED) 2 .

The segmented income statement would help the president of Buckeye Department Stores gain insight into which division and which individual stores are performing well or having difficulty. Such information serves to direct management's attention to areas where its expertise is needed.

PROBLEM 12-47 (30 MINUTES) Responsibility-accounting system:

PROBLEM 12-46 (CONTINUED) 2 .

The segmented income statement would help the president of Buckeye Department Stores gain insight into which division and which individual stores are performing well or having difficulty. Such information serves to direct management's attention to areas where its expertise is needed.

PROBLEM 12-47 (30 MINUTES) Responsibility-accounting system:

1. At least two potential behavioral advantages if Building Services Co.'s (BSC's) managers accept and participate in the development of budgets are as follows: They would be motivated to plan ahead and promote goal congruence. They would be pleased to be responsible only for those items they can control. •

•

2. At least two potential problems that could arise if the managers do not accept the change in philosophy are as follows: They could resent being measured on an individual basis, since they may be responsible for costs over which they have no control. •

The could focus too much on their own department's goals at the possible detriment to the organization as a whole (suboptimization). •

3. If the managers support the new system, and most of the disadvantages pointed out above are avoided, the responsibility-center system will enhance the alignment of  organizational and personal goals. Since Commercial Maintenance, Inc. (CMI) took the time to fully explain and communicate the system to BSC's managers, by pointing out

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

the advantages and encouraging their participation, organizational and personal goals will likely become aligned.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

PROBLEM 12-47 (CONTINUED) Participatory budgeting system:

1. At least two potential behavioral benefits are the following: BSC's managers are likely to accept the system and be motivated to attain the budget targets, since they were actively involved in setting the goals and know what is expected of them. •

Communication and group cohesiveness would be improved, because the managers would feel part of a team. •

2. At least two potential problems that could arise are as follows: The managers could be motivated to "pad" their budgets, putting slack in the plan to ensure meeting the goals. •

Overemphasis on departmental goals could hurt cross-departmental employee relations. •

3. Participatory budgeting can contribute to an organization’s goals by encouraging buy-in to the resulting budget and performance evaluation by the organization’s employees. There is no reason to believe that such an approach would not be beneficial for BSC.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

ROBLEM 12-48 (45 MINUTES) Memorandum Date:

Today

To:

Mathew Basler, President of Warriner Equipment Company

From: I. M. Student Subje Responsibility-Accounting System ct: Warriner Equipment Company's critical success factors are as follows: 1 .

Cost-efficient production: The firm must meet the market price, which implies producing in a cost-efficient manner.

2 .

High product quality: Stated by the company president as necessary for success.

3 .

On-time delivery: Also noted by the company president as critical to the firm's success.

Note that the product price is not a critical success factor, since it is largely beyond the company's control. The price is determined by the market. A responsibility-accounting system in which the plants are profit centers is consistent with achieving high performance on the firm's critical success factors. The plant managers are in the best position to influence production cost control, product quality, and on-time delivery. The sales districts should be revenue centers, in which the sales district managers are accountable for meeting sales projections. Suppose the plants are cost centers and the sales districts are revenue centers. When a rush order comes in, the plant manager's incentive is to reject it because rush orders tend to increase production costs (due to increased setups, McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

interrupted production, etc.). The sales district manager's incentive is to push rush orders, because accepting a rush order results in a satisfied customer and increased future business. Thus, there is a built-in conflict between the plant managers and the sales district managers.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

PROBLEM 12-48 (CONTINUED) If the plants are profit centers, then each plant manager is encouraged to consider both the costs and the benefits of a rush order. The cost is increased production cost, and the benefit is a satisfied customer. Since the plant manager is rewarded for achieving a profit, he or she has an incentive to weigh the cost-benefit trade-off inherent to the rush-order problem. In conclusion, I recommend that the plants be designated as profit centers and the sales districts be designated as revenue centers. PROBLEM 12-49 (40 MINUTES) 1 .

The factors that should be present for an organization's quality program to be successful include the following: •

•

•

2 .

Evidence of top management support, including motivational leadership and resource commitments. Training of those involved, including employees and suppliers. A cultural change leading to a corporate culture committed to the customer and to continuous, dynamic improvement.

From an analysis of the cost-of-quality report, the program appears to have been successful, because of the following: •

•

•

Total quality cost has declined from 23.4 to 13.1 percent of total production costs. External failure costs, those costs signaling customer dissatisfaction, have declined from 8 percent of total production cost to 2.3 percent. These declines in warranty repairs and customer returns should translate into increased sales in the future. Internal failure costs have been reduced from 4.6 to 2.3 percent of production costs, and the overall cost of scrap

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

and rework has gone down by 45.7 percent ($188,000 – $102,000)/$188,000. •

Appraisal costs have decreased by 43.4 percent [($205,000 – $116,000)/$205,000]. Higher quality is reducing the demand for final testing.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

PROBLEM 12-49 (CONTINUED) •

Quality costs have shifted to the area of prevention, where problems are solved before the customer becomes involved. Maintenance, training, and design reviews have increased from 5.8 percent of total production cost to 6 percent and from 24.9 percent of total quality cost to 45.7 percent. The $30,000 increase is more than offset by decreases in other quality costs.

3 .

Tony Reese's current reaction to the quality improvement program is more favorable because he is seeing the benefits of having the quality problems investigated and solved before they reach the production floor. Because of  improved designs, quality training, and additional preproduction inspections, scrap and rework costs have declined. Production personnel do not have to spend an inordinate amount of time on customer service, because they are now making the product right the first time. Throughput has increased and throughput time has decreased. Work is now moving much faster through the department.

4 .

To measure the opportunity cost of not implementing the quality program, management could do the following: •

•

Assume that sales and market share will continue to decline and then calculate the revenue and income lost. Assume that the company will have to compete on price rather than on quality and calculate the impact of having to lower product prices.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

SOLUTIONS TO CASES CASE 12-50 (45 MINUTES) 1.

Segmented income statement: CATHY'S CLASSIC CLOTHES: NORTHEAST REGION Segmented Income Statement For May Coastal District

Sales....................................... Less: Cost of goods sold........... Gross margin........................... Operating expenses: Variable selling................. Variable administrative..... Other direct expenses:............. Store maintenance............ Advertising....................... Rent and other costs......... District general administrative expenses (allocated)......... Regional general and administrative expenses (allocated)......... Total expenses........................ Net Income..............................

New Haven Store

Boston Store

$1,500, 000

$600,00 0

$525,0 00

633,750 $ 866,250

252,000

220,50 0

$ 90,000 37,500 12,600 75,000 150,000

$348,00 0 $ 36,000 15,000 7,500 50,000 60,000

180,000

$304,5 00 $ 31,500 13,125 600 5,000 45,000

72,000 63,000 165,000 $ 710,100 $ 156,150

McGraw-Hill/Irwin

©  2002

55,000 55,000 $295,50 0 $ 52,500

$213,2 25 $ 91,275

The McGraw-Hill Companies, Inc.

CASE 12-50 (CONTINUED) Supporting calculations:

Sales....................... Cost of goods sold.. . Variable selling....... Variable administrative......... Maintenance........... Advertising............. Rent........................ District expenses.....

Coastal District

New Haven Store

Boston Store

Given Given $1,500,000 x .06 $1,500,000 x .025 $7,500 + $600 + $4,500

$1,500,000 x .40 $600,000 x . 42 $600,000 x . 06 $600,000 x . 025 Given

$1,500,000 x .35 $525,000 x . 42 $525,000 x . 06 $525,000 x . 025 Given

($75,000) (2/3)

$50,000 x . 10 at New Haven $150,000 x . 30 for Coastal District $180,000 x . 35

Given Given Given

$150,000 x . 40 $180,000 x . 40

2. The Portland store's net income for May is $12,375 ($156,150 - $52,500 - $91,275). 1.

The impact of the responsibility-accounting system and bonus structure on the managers' behavior and the effect of this behavior on the financial results for the two stores include the following: (a)

McGraw-Hill/Irwin

New Haven Store:

©  2002

The McGraw-Hill Companies, Inc.

•

•

Because the bonus is based on sales over $570,000, the manager has concentrated on maximizing sales and has paid little attention to controllable costs. As a result, the store's net income is less than 9 percent of sales and only 34 percent (rounded) of total net income. In an effort to maximize sales, the New Haven store spent 10 times as much as the Boston store on advertising but generated only $75,000 more in sales. Thus the advertising must not have been very effective and should be better controlled.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

CASE 12-50 (CONTINUED) (b) •

•

2.

Boston Store:

Because the manager of the Boston store is motivated to maximize net income, there appears to be a tendency to cut back on discretionary expenses, such as store maintenance and advertising. While management is seeking cost control by implementing a bonus based on net income, the lack of  spending on these discretionary items may have an adverse long-term effect. The manager of the Boston store will be unhappy with the inclusion of allocated district and regional expenses in the calculation of net income. These expenses are not likely to be controlled by the store manager and will reduce the bonus received by the manager of the Boston store. The assistant controller's actions violate several standards of ethical conduct for management accountants, including the following: Competence

•

Prepare complete and clear reports and recommendations after appropriate analysis of relevant and reliable information. Integrity :

•

•

Communicate unfavorable as well as favorable information and professional judgements of opinions. Refrain from engaging in any activity that would discredit the profession. Objectivity :

•

Communicate information fairly and objectively.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

•

Disclose fully all relevant information that could reasonably be expected to influence and intended user's understanding of the reports, comments, and recommendations presented.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

CASE 12-51 (60 MINUTES) 1.

Segmented income statement by geographic areas: PACIFIC RIM INDUSTRIES SEGMENTED INCOME STATEMENT BY GEOGRAPHIC AREAS FOR THE FISCAL YEAR ENDED APRIL 30, 20x0

Geographic Areas United Canad Asia States a

Unalloc ated

Total

Sales in units a Furniture.......

64,000

16,000

80,000

Sports............

72,000

72,000

36,000

32,000

32,000

96,000

160,00 0

168,000

120,00 0

212,00 0

500,00 0

$ 128,00 0 1,440,00 1,440,0 0 00

$ 640,00 0 720,00 0

$1,280, 000

480,00 1,440,0 0 00 $2,432,0 $2,048, $2,800, 00 000 000

2,400,0 00 $7,280, 000

160,00 0 180,00 0

Appliances..... Total unit sales.................. Revenueb Furniture....... Sports............

$ 512,000

3,600,0 00

Appliances..... 480,000

Total revenue Variable costsc Furniture....... Sports............

$ 384,000

$ 96,000

864,000

864,00 0

$ 480,00 0 432,00 0

$ 960,00 0 2,160,0 00

Appliances..... McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

336,000

Total variable costs Contribution margin............... Fixed costs Manufacturing overheadd..... Depreciatione.

336,00 1,008,0 0 00 $1,584,0 $1,296, $1,920, 00 000 000 $ $ $ 848,000 752,00 880,00 0 0

$ 165,000 134,400

Administrative and selling expenses........... Total fixed costs.................

$ 359,400

Operating income (loss)...............

$ 488,600

McGraw-Hill/Irwin

60,000

$ 135,00 0 96,000

1,680,0 00 $4,800, 000 $2,480, 000

$ 200,00 0 169,60 0

$ 500,00 0 400,00 0 $ 750,000

100,00 0 $ 331,00 0

250,00 0 $ $ 619,60 750,000 0

$ 421,00 0

$ 260,40 0

©  2002

$ (750,00 0)

1,160, 000 $2,060, 000 $ 420,00 0

The McGraw-Hill Companies, Inc.

CASE 12-51 (CONTINUED) SUPPORTING CALCULATIONS a

Sales in units Total Units

United States Furniture...................... Sports........................... Appliances.................... Canada Furniture...................... Sports........................... Appliances.................... Asia Furniture...................... Sports........................... Appliances....................

% of  Sales

= Units Sold

160,00 0 180,00 0 160,00 0

.40

64,000

.40

72,000

.20

32,000

160,00 0 180,00 0 160,00 0

.10

16,000

.40

72,000

.20

32,000

160,00 0 180,00 0 160,00 0

.50

80,000

.20

36,000

.60

96,000

b

Revenue Units Sold

Unit Price

Revenu e

United States Furniture...........................

64,000

$ 8.00

Sports...............................

72,000

20.00

Appliances.........................

32,000

15.00

$ 512,000 1,440,0 00 480,000

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

Canada Furniture........................... Sports...............................

16,000 72,000

8.00 20.00

Appliances.........................

32,000

15.00

Asia Furniture........................... Sports............................... Appliances.........................

80,000 36,000 96,000

8.00 20.00 15.00

McGraw-Hill/Irwin

©  2002

128,000 1,440,0 00 480,000 640,000 720,000 1,440,0 00

The McGraw-Hill Companies, Inc.

CASE 12-51 (CONTINUED) c

Variable costs

Units Sold (1) United States Furniture............ Sports................ Appliances.......... Canada Furniture............ Sports................ Appliances.......... Asia Furniture............ Sports................ Appliances..........

Variable Variab Mfg. le Cost/Un Selling it (2) Cost/U nit (3)

64,00 0 72,00 0 32,00 0

$4.00

Total Variable Cost (1) [(2) + (3)]

$2.00 $ 384,000

9.50

2.50

864,000

8.25

2.25

336,000

16,00 0 72,00 0 32,00 0

4.00

2.00

96,000

9.50

2.50

864,000

8.25

2.25

336,000

80,00 0 36,00 0 96,00 0

4.00

2.00

480,000

9.50

2.50

432,000

8.25

2.25 1,008,000

Total Manufact uring Overhead

Area Variab le Costs

Proport ion of  total

Allocated Manufact uring Cost

$500,00

$1,584,

33%

$165,000

d

Manufacturing overhead

United States........ McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

Canada.................

0 500,000

000 27%

135,000

1,296,0 00 Asia...................... Total.....................

McGraw-Hill/Irwin

500,000

40% 1,920,0 00 $4,800, 000

©  2002

200,000 $500,000

The McGraw-Hill Companies, Inc.

CASE 12-51 (CONTINUED) e

Depreciation expense

Total Deprecia tion United $400,0 States………………… 00 Canada………………… 400,00 ……... 0 Asia…………………… 400,00 ………. 0 Total…………………… ……… 2.

Area Units Sold

120,000

Proport ion Allocate of  d Total Deprecia tion 33.6% $134,40 0 24.0% 96,000

212,000

42.4%

168,000

500,000

169,600 $400,00 0

Areas where the company’s management should focus its attention in order to improve corporate profitability include the following: •

The income statement by product line shows that the furniture product line may not be profitable. The furniture product line does have a positive contribution. However, the fixed costs assigned to the product line result in a loss. Management should investigate: —The possibility of increasing the selling price of these products. —The possibility of increasing volume by cutting prices or increasing advertising, resulting in a larger total contribution margin. —Cutting variable costs associated with this product line. —Discontinuing the manufacture of furniture and concentrating on the other product lines that are more profitable.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

—How much of the fixed costs allocated to furniture are separable (avoidable) if the product line is discontinued.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

CASE 12-51 (CONTINUED) •

The income statement by geographic area shows that the Asian market is the least profitable sales area. In order to improve the profit margin in the Asian market, management should: — Investigate the selling and administrative expenses in this area as they are considerably higher than those in other areas. — Consider increasing the sales of product lines other than furniture as this product line makes the smallest contribution to profit.

•

Management should review the unallocated expenses in an attempt to reduce these costs and improve overall profitability.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.

CURRENT ISSUES IN MANAGERIAL ACCOUNTING ISSUE 12-52 “HOW FORD, FIRESTONE LET THE WARNINGS SLIDE BY AS DEBACLE DEVELOPED: THEIR SEPARATE GOALS, GAPS IN COMMUNICATION GAVE RISE TO RISKY SITUATION," THE WALL STREET JOURNAL, SEPTEMBER 6, 2000, TIMOTHY  AEPPEL, CLARE ANSBERRY, MILO GEYELIN AND ROBERT I. SIMISON. 1. Firestone should have been more aggressive in keeping an eye out for defects since it previously had a major problem with tread peeling off its tires. Ford should have kept its own records of tire performance instead of depending on Firestone's reassurances. 2. The value chain is a set of business functions that add value to the products or services of an organization. The value chain includes functions such as the following: research and development: design of products, services, or processes; production; marketing; distribution; and customer service. In this scenario, Ford and Firestone are each part of the other’s value chain.

ISSUE 12-53 “MANAGER'S JOURNAL: ANOTHER JACK WELCH ISN'T GOOD ENOUGH," THE WALL STREET JOURNAL , NOVEMBER 22, 1999, MICHAEL ALLEN. The next leader of GE will need to have even bigger ideas and imagination than today's CEO. He or she must have the vision and foresight to anticipate what the enterprise will need to become over the next 20 years. He or she will need to lead leaders and have the political skills to deal with challenges from outside the company.

McGraw-Hill/Irwin

©  2002

The McGraw-Hill Companies, Inc.